Friday, August 29, 2008

Quotable Quotes: McCain Does Streisand

Like a good Harvard trained lawyer, Barack Obama made his forceful closing argument and brought about the conclusion of the Democratic National Commercial. Not to be outdone, the Republicans are pulling out all the stops to match the Democrats mile-high extravaganza. So, here's a little taste of what's in store for us from St. Paul, MN next week.

Happy viewing and have a good weekend.

To listen to McCain Does Streisand, click here

Thursday, August 28, 2008

Minyanville posting: "Stagflation Lite?"

This week's Minyanville posting focuses on five market P/E ratios set to five broad economic scenarios for the the year ahead: "Bear markets are periods when many investors lose sight of the fact that stocks have an inherent long-term upward bias. This upward bias is anchored in factors such as..."

To read this week's complete Minyanville posting, click here

Wednesday, August 27, 2008

Beyond the Sound Bite: An Interview with Dan Clifton

Sandwiched between the political conventions and the debates (President and Vice President) are key congressional and economic issues that will likely have a significant impact on the markets in the ever volatile month of September. Notably the Frank/Dodd hearings, the CFTC energy speculation report, an FOMC meeting, the ban on offshore drilling ends, and a major debt rollover for Freddie and Fannie.

My interview with the astute Head of Policy Research for Strategas Research Partners includes many of these issues along with the geopolitical driver behind Biden's selection as Democratic Vice Presidential candidate, the impact of political convention bounces, a more activist US Congress, plus the rolling back of the Reagan revolution in tax policy.

Beyond the Sound Bite interviews can be found at
To listen to this week's podcast interview, click here

Tuesday, August 26, 2008

There They Go Again

commentary from this week's "Sector and Styles Strategy Report*:

Back on February 11th I wrote a report titled “What are the Sell Side Analysts Smoking?” The commentary and report focused on the excessively optimistic outlook earnings forecasts for 2008 by bottom-up analysts. Excessively optimistic in that top-down forecasts were substantially below the bottom-up numbers.

At the time, the bottom-up crew projected operating earnings for the S&P 500 for 2008 was an astounding +24% over 2007’s numbers ($102 versus $82.54). Whereas, the top-down forecasts had operating earnings for 2008 in mid $80s on down to the mid $70s.

Since then, particularly over the past two months, the bottom-up forecasts have gradually ground down to reality so much so that they have now reached the slightly negative territory of -2.4% (see Earnings Outlook on page 3 of the report*). One might therefore conclude that for 2009 the bottom-up boys and girls would factor in more of the data and analysis from the top down crowd but that is just not the case. For 2009, the numbers are equally, if not more, astounding.

According to the recent consensus forecasts, bottom-up earnings growth expectations for 2009 is a whopping +26%! Even after you exclude Financials you still end up with a +13.3% number. Excluding Financials and Energy gets you to 13.8%. And, lest you think that this dream state is restricted to the US, think again. The global numbers are a cool +18.7%, up from 2.8% currently projected for 2008.

Where does this thinking come from? How do you get such optimistic numbers when most top-down forecasts (from economists and investment strategists, often in the very same firms!) are much like this year – closer to 0%.

I believe a major part of the problem lies in the process by which bottom-up analysts go about making their forecasts. Specifically, when it comes to making earnings forecasts, many if not most bottom up analysts have a “silo” mentality, often acting as though there were no interconnections between their defined industries and companies and the broader macro climate. To be more specific on this point, I am not talking about your basic, tradition GDP starting point but rather the thematic and trend issues that are often hard to quantify such as the credit crisis and the risk of contagion therefrom.

Investment Strategy Implications

There is no news in stating that there are many risks facing investors as the last leg of 2008 unfolds and 2009 comes closer into view. Yet, what seems to be news to many bottom-up analysts is the interconnectedness and impacts from thematic and global macro trend issues.

Therefore, for the benefit of those who insist on using bottom-up forecasts exclusively, let me offer that the great risk for 2009 is the one I have written about time and again – credit related losses that move UP and OUT: UP the quality spectrum (within an asset group) and OUT to other asset groups, such as credit cards, student loans, auto loans, and corporate debt.

This danger is tied to the economic pain that results from deleveraging, with deleveraging not restricted to the banking industry but to the US consumer as he/she comes to terms with the consequences of a negative wealth effect and the need to repair their seriously overleveraged balance sheet. The result would be more savings, less spending, an extended period of subpar growth, and a transformation of the US and world economy away from its high dependency on US consumption.

Reliance on the traditional and the standard methodologies during times of economic transformation and change can and almost certainly will lead to faulty projections that can be very expensive.

*Published Aug. 25, 2008. Subscription required. For more information, click here

Monday, August 25, 2008

Sectors and Styles Strategy Report: August 25, 2008

excerpt from this week's report*:

"Back on February 11th I wrote a report titled “What are the Sell Side Analysts Smoking?” The commentary and report focused on the excessively optimistic outlook earnings forecasts for 2008 by bottom up analysts. Excessively optimistic in that top down forecasts were substantially below the bottom up numbers..."

*Published Aug. 25, 2008. Subscription required. For more information, click here

Friday, August 22, 2008

Quotable Quotes: Triumph the Insult Comic Dog

Now that TIme Warner's "The Dark Knight" has moved into the #2 all time movie spot displacing "Star Wars", a little look at the former runner up with no other than that master of the galactic insult, Triumph.

To view the video, click here

Have a good weekend.

Thursday, August 21, 2008

Minyanville posting: "What's Your Core Investment Style?"

For my second posting on Minyanville, the focus is on investors appreciating the distinction between buy and hold, market timing, and modified market timing (a.k.a. sector tilting):

"Whether they know it or not, all investors experiencing the bear are faced with the age-old question, "What to do with their long-term holdings in a bear market?" The typical decision is, "Do I sell it all or do I ride it out?" Unfortunately, most individual investors do not consider a third alternative..."

To read this week's complete Minyanville posting, click here

Wednesday, August 20, 2008

Beyond the Sound Bite: An Interview with Beth Ann Bovino

With the US economy tettering on the edge of a second down leg and much of the global economy poised to join, economic forecasts range from the plain bad to the outright terrible.

My interview with the Senior US economist for Standard and Poors includes the impending W shaped US recession, the state of the US consumer, capex spending, US exports, and the deleveraging process.

Beyond the Sound Bite interviews can be found at
To listen to this week's podcast interview, click here

Tuesday, August 19, 2008

A Scramble for Alpha in an Alpha Starved Environment

commentary from this week’s “Sectors and Styles Strategy Report”*:

Unless one buys into the idea implied by the recent price action of US consumer related sectors (see pages 4 and 8*) that economic matters in the US are about to get much better, the only reasonable conclusion one can reach re the recent market action is the hedge fund dominated action of rotational trading. A scramble for alpha in alpha starved environment (for most hedge funds, specifically) appears to be clearly underway.

As noted on numerous occasions and described at my recent NYSSA Market Forecast event, the current equity markets are overwhelmed by short term hedge fund traders with a near non existence from the more traditional investors. For what else can explain the surge and purge nature of the market action overall. Or the recent fascination with the second least attractive sector – Consumer Discretionary?

At the same time, the current US dollar rally (see chart on next page*) has encouraged fence sitters to take the plunge into US assets.

And while the dollar rally may have more strength left in it, the difficulties that the US will face in the coming years should give longer-term investors pause before completely buying into the strong dollar scenario.

Investment Strategy Implications

Just like cyclical corrections in secular bull markets, counter trend moves in bear markets are common. And can be quite productivity played if one is nimble. Combined with the recently oversold Financials sectors (which provides an alleviation of the pressure on the market overall) and strong undervaluation for equities (see next page for several thoughts on this matter*), the reasoning behind a fully invested position for the time being seems warranted.

Nevertheless, as noted in last Thursday’s Minyanville blog posting, this is a game of chicken with one of the signs to keep a watch out for is a return to form, especially in areas such as Consumer Discretionary and Financials.

*Published Aug. 18, 2008. Subscription required. For more information, click here

Monday, August 18, 2008

Sectors and Styles Strategy Report: August 18, 2008

excerpt from this week's Sectors and Styles Strategy Report*:

"Last week’s tepid US market action belied the much stronger decline in global markets (see page 8 of the report). Additionally, emergent strength in US consumer related sectors was evident. The combination of the two was modestly offset by the exceptional performance in the Small Cap growth position. Nevertheless, the MGP produced a slight negative alpha of 10 basis points**, aided also by the pricing difference between the cumulative results of the economic sectors (+0.52%) versus the S&P 500 (+0.15%)..."

*To gain access to this week's report (and all reports), click on the newsletter subscription information link to your left.
**For longer-term performance data, see the charts to your left.

Friday, August 15, 2008

Quotable Quotes: Sun Tzu

As aquaman (a/k/a Michael Phelps) seeks to make Olympic history in Beijing, the advice from a Chinese champion from another era and another discipline is ageless. Be it sport, politics, business, or war, a few words from Sun Tzu.

"Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat."

"Speed is the essence of war. Take advantage of the enemy's unpreparedness; travel by unexpected routes and strike him where he has taken no precautions."

"Pretend inferiority and encourage his arrogance."

"What the ancients called a clever fighter is one who not only wins, but excels in winning with ease."

"Victorious warriors win first and then go to war, while defeated warriors go to war first and then seek to win."

Have a good weekend.

Thursday, August 14, 2008

A Game of Chicken

I am delighted to announce my affiliatiion with Minyanville. Beginning today and for every Thursday going forward, my blog postings will appear on the Minyanville website. The postings will be more "educational" in nature emphasizing core investment principles and practices often forgotten or neglected.

re today's inaugural installment:

"Portfolios that benefited from being underweight the two sick men of the US economic sectors - Consumer Discretionary and Financials - were faced with a performance related decision this summer: play the potential counter trend rally or sit on the sidelines and watch your relative performance suffer. Take, for example, Consumer Discretionary..."

To read today's posting on Minyanville, click here

Wednesday, August 13, 2008

Beyond the Sound Bite: An Interview with Roy Johnson

When it comes to understanding the drivers of corporate success, shareholder value, value based management, and value based finance are more than catchy phrases. They are analytical methodologies that enable a deeper understanding of the elements of competitive advantage.

My interview with Johnson includes economic profit (versus accounting profit), MVA (market value added), invested capital intensity, and the creators and destroyers of corporate value.

Beyond the Sound Bite interviews can be found at
To listen to this week's podcast interview, click here

Tuesday, August 12, 2008

One Year and Counting

“Of all the newfangled financial creations that have caused problems this past year, arguably the most nerve-wracking are derivatives traded over-the-counter…”
August 8, 2008

And the beat goes on.

On several occasions over the past year, hopes rose that the credit crisis was about to abate only to be dashed by yet another set of surprisingly large bank write-downs. Surprising to some but not on these pages. The risks from the credit crisis are far broader than originally thought and only now becoming grudgingly clear. And there is truly no end in sight.

UP and OUT is my way of characterizing what Nouriel Roubini has accurately described as the full scope of the financial Frankensteins created over the past decade. UP in the form of write-downs moving up the quality spectrum within an asset group. And OUT to other financial instruments created by the wizards of Wall Street.

Exacerbating the situation is the (efficient market hypothesis inspired) accounting rule change instituted last November, FAS 157, in which assets impacted by diminished demand produce lower values requiring mark-to-market write-downs thereby requiring new capital to meet banking related capital requirements leading to further pressure across the entire banking system. A vicious circle.

The equity markets are beset with multiple layers of issues – some, such as inflation, likely to not be an issue for much longer. However, fears of a global economic slowdown are now more real than ever, particularly when we get to 2009 and corporate default rates begin to rise as noted in the following chart* from last week’s NYSSA Market Forecast event (courtesy high yield expert Marty Fridson):

Moreover, according to Marty, the peak isn’t projected until 2010 at an 11% rate. This is the origin/catalyst of the $250 billion (net) credit default swap pain noted by PIMCO’s Bill Gross back in January of this year. So, if you want to see how banking losses get into the $1 to 2 trillion range, this is one contributing component.

Investment Strategy Implications

Last week’s so-called “Olympian rally” in equities must be taken with a huge grain of salt. As noted in several areas of this report*, the contradictory nature of the recent market rally is hardly the stuff of sustainability. Highly fragmented market action with little to no sustained and coordinated leadership provides no real investment comfort beyond riding the bear rally from its undervalued levels.

Until there is more market structure, an overall market neutral approach is advisable to take. Scalping “lunch money” trades is also a good short-term course of action for a modest amount of money. However, given the looming danger of a no-end-in-sight credit crisis and a 2009 that may stress test more than the banking system, the deleveraging process on multiple levels (banking, US consumer) warrants an above average level of caution.

*see report. For subscription information, click on the newsletter link to your left.

Monday, August 11, 2008

Sectors and Styles Strategy Report: August 11, 2008

excerpt from this week's report:
"No doubt, last week’s $14.3 billion surge in consumer credit will help the US economy in the near term, but eventually US consumers must begin to repair their debt laden balance sheets. At noted in my Thursday blog posting, until consumer expectations re their assets (real estate and financial) may not deliver their future needs (notably retirement), consumers live in denial and balance sheet repair (in the form of reduced borrowing and increased savings – from income) is deferred. This is a question of when not if..."

*To gain access to this week's report (and all reports), click on the newsletter subscription information link to your left.

Friday, August 8, 2008

Quotable Quotes: Paris Hilton's Energy Plan

In the time honored news tradition of man bites dog, Paris Hilton, poolside in a leopard bikini and gold pumps, demonstrates that she can actually speak in whole sentences as she shares with us her energy plan for the US.

Only in America.

To view the video, click here

Have a good weekend.

Thursday, August 7, 2008

Notes From NYSSA’s Market Forecast Event and the Forbes and Furman Interviews

The great value add in moderating events and conducting interviews is the ability to select the topics to discuss and questions to pose to some of the best minds in the investment, economic, and geopolitical worlds. So, here are a few takeaways from this Tuesday’s NYSSA Market Forecast luncheon and the two recent interviews conducted with the economic advisors to the US presidential candidates.

My panelists for the NYSSA event – Rich Bernstein, Marty Fridson, Don Rissmiller, and Phil Roth – covered a wide range of key investment strategy (fundamental and technical), economic, and credit market (specifically high yield) issues.

• The equity markets are solidly in the grips of the bear with narrowing leadership a major signal that a reversal is not quite in the cards. That said, the current rally phase bears monitoring for any signs of broadening strength, which has thus far not developed. In other words, a bear rally at best.

• The risks of a US economic double dip next year remain elevated. This is not the consensus view most investors generally have but one that is gaining traction, particularly when you consider the following two points.

• The credit crisis is far from over and was exemplified by one example – the coming dramatic rise in corporate defaults, specifically at the low end of the quality spectrum: high yield issues. Default rates, suppressed by recent generous covenants, will begin to rise in 2009 from current levels of just under 3% to 8% in the spring of 2009 and then to a likely peak of 11% in 2010. The ramifications to the banking sector in the form of credit default swaps could be substantial (remember Bill Gross' $250 billion in CDS write downs?).

• The US consumer will begin to save when he/she finally buys into the idea that prior postives periods of the wealth effect are gone for good. At that point, spending will decline and savings (from earnings) must rise as it becomes increasingly apparent that their retirement nest eggs – in the form of assets (real estate and financial) – cannot be counted on.

• Long-term US Treasury rates appear poised for a substantial decline largely due to the likelihood that inflation will not be a sustainable problem in the US, that the US economy will experience a period of longer economic weakness, and for the reasons noted above re the credit crisis. In this regard, it is worth noting that investment professional sentiment re the prospects of lower long term rates is almost non-existent. A contrarian signal for sure.

There were many other valuable thoughts and insights, which I will share with subscribers in next week’s “Sectors and Styles Strategy Report”*.

As for the Forbes and Furman interviews, what was most striking to me was the clear difference in tone and temperament of each economic advisor. The Steve Forbes interview was much more assertive, more decisive in the economic action steps a McCain administration would take. Whereas, the Jason Furman interview sounded far less ideological with a far more pragmatic view from an Obama administration than one would be led to believe from the primaries. These contrasting points can be clearly heard not only in the tone and style of Forbes versus Furman but also in the substantive areas of tax policy and, strikingly, in Furman’s responses to my questions re what the US budget deficit would look like at the end of an Obama first term.

If you haven’t taken the time to compare and contrast the two interviews, perhaps you might want to consider doing just that. What you will notice is that my questions and interview style allows the guest to more room to fully develop his/her thoughts thereby revealing their more deeply held views.

Note: The Forbes and Furman interviews can be found at

*subscription required. see link to your left for newsletter subscription information.

Wednesday, August 6, 2008

Beyond the Sound Bite: An Interview with Jason Furman

In an exclusive befitting the major cable networks, I am pleased to provide listeners with the ability to compare and contrast the US presidential candidates' economic plans - last week's interview with McCain economic advisor Steve Forbes and this week's guest, Obama chief economic advisor Jason Furman.

In this week's interview, Furman describes the Obama campaign's take on tax policy, the budget and current account deficits, regulation, and the campaign's emphasis on pragmatism.

Beyond the Sound Bite interviews can be found at
To listen to this week's podcast interview, click here

Tuesday, August 5, 2008

The Dog Days of Betwixt and Between

excerpts from this week's "Sectors and Styles Strategy Report" commentary (published yesterday):

idiom: Betwixt and Between
“neither the one nor the other; in a middle or unresolved position”

The past ten days have seen a drift in US equities with a certain amount of sector turmoil, mostly Financials up and Energy down (see first chart, with Utilities the biggest loser). From a size perspective, the bear rally produced the beta trade with Micro and Small cap doing exceptional well (second chart).

While the bear rally has produced a respite from the well publicized (and I would argue near term overplayed) angst emanating from the twin disasters of banking losses and high energy prices, the far more important stagflation lite with “no end in sight” for both bank losses and housing (which are becoming mutually exclusive) looms large in the 2009 background.

In the meantime, for the remainder of this year the top-down derived $82 operating earnings for 2008 for the S&P 500 seems more and more on target as the bottom up analysts slowing come to grips with reality (see page 3*).

Absent a meaningful catalyst, it is hard to see how leaning one way or the other at this time makes strong investment sense. Marking time and exploiting what little super short term trading opportunities might present themselves may be the best approach as the dog days of summer roll on.

Investment Strategy Implications

The idiom “betwixt and between” seems most apt for the current economic and investment climate suggesting the market neutral position I noted in last Thursday’s blog posting. No doubt time will present the next “great” investment idea. Until then, forcing the issue seems destined to destroy alpha.

*see report. For subscription information, click on the newsletter link to your left.

Monday, August 4, 2008

Sectors and Styles Strategy Report: August 1, 2008

excerpts from this week’s report:

Model Growth Portfolio (MGP)
“With the exception of Biotech’s +13 basis points, very little market movement produced fairly quiet price action resulting in a +3 basis point week…”

Expected Return Valuation Model
“The continuing struggle between the risk adjustment process (dark blue zone) and the projected 12% fair value levels (grey zone) at $82. What argues in favor of the latter is…”

Moving Averages Scorecard
“After week’s teetering on the edge, Utilities’ mega trend finally turned bearish leaving Energy as the sole US economic sector on the plus side. Utilities, viewed by some as…”

*To gain access to this week's report (and all reports), click on the newsletter subscription information link to your left.

Friday, August 1, 2008

Wonderland: Is John McCain Stupid?

While the Obama campaign has to deal with Ludacris' latest ludicrous rap "song", one of the most popular postings in the online edition of yesterday's Wall Street Journal with the above title is sure to provide the McCain campaign with its own set of headaches - this one self induced.

In the media dominated world of politics, words and image matter a lot. So, when a presidential candidate provokes comments from a usually supportive voice like the Journal, it is worth noting.

For those of you who do not have a WSJ online subscription, here is Dan Henninger's commentary - quotable quotes the McCain campaign could, no doubt, do without:

Is John McCain losing it?

On Sunday, he said on national television that to solve Social Security "everything's on the table," which of course means raising payroll taxes. On July 7 in Denver he said: "Senator Obama will raise your taxes. I won't."

This isn't a flip-flop. It's a sex-change operation.

He got back to the subject Tuesday in Reno, Nev. Reporters asked about the Sunday tax comments. Mr. McCain replied, "The worst thing you could do is raise people's payroll taxes, my God!" Then he was asked about working with Democrats to fix Social Security, and he repeated, "everything has to be on the table." But how can . . .? Oh never mind.

Yesterday he was in Aurora, Colo., to wit: "On Social Security, he [Sen. Obama] wants to raise Social Security taxes. I am opposed to raising taxes on Social Security. I want to fix the system without raising taxes."

What I'm asking is, does John McCain have the mental focus, the intellectual discipline, to avoid being out-slicked by Barack Obama, if he isn't abandoned by his own voters?

It's not just taxes. Recently the subject came up of Al Gore's assertion that the U.S. could get its energy solely from renewables in 10 years. Sen. McCain said: "If the vice president says it's doable, I believe it's doable." What!!?? In a later interview, Mr. McCain said he hadn't read "all the specifics" of the Gore plan and now, "I don't think it's doable without nuclear power." It just sounds loopy.

Then this week in San Francisco, in an interview with the Chronicle, Sen. McCain called Nancy Pelosi an "inspiration to millions of Americans." Notwithstanding his promises to "work with the other side," this is a politically obtuse thing to say in the middle of a campaign. Would Bill Clinton, running for president in 1996 after losing control of the House, have called Newt Gingrich an "inspiration"? House Minority Leader John Boehner, facing a 10-to-20 seat loss in November, must be gagging.

The one thing -- arguably the only thing -- the McCain candidacy has going for it is a sense among voters that they don't know what Barack Obama stands for or believes. Why then would Mr. McCain give voters reason to wonder the same thing about himself? You're supposed to sow doubt about the other guy, not do it to yourself.

Yes, Sen. McCain must somehow appeal to independents and blue-collar Hillary Democrats. A degree of pandering to the center is inevitable. But this stuff isn't pandering; it's simply stupid. Al Gore's own climate allies separated themselves from his preposterous free-of-oil-in-10-years whopper. Sen. McCain saying off-handedly that it's "doable" is, in a word, thoughtless.

Speaker Pelosi heads a House with a 9% approval. To let her off the hook before the election reflects similar loss of thought.

The forces arrayed against Sen. McCain's candidacy are formidable: an unpopular president, the near impossibility of extending Republican White House rule for three terms, the GOP trailing in races at every level, a listless fundraising base, doubtful sentiments about the war, a flailing economy.

The generic Democratic presidential candidate should win handily. Barack Obama, though vulnerable at the margin, is a very strong candidate. This will be a turnout election. To win, Mr. McCain needs every Republican vote he can hold.

Why make it harder than it has to be? Given such statements on Social Security taxes, Al Gore and the "inspirational" Speaker Pelosi, is there a reason why Rush Limbaugh should not spend August teeing off on Mr. McCain?

Why as well shouldn't the Obama camp exploit all of this? If Sen. Obama's "inexperience" is Mr. McCain's ace in the hole, why not trump that by asking, "Does Sen. McCain know his own mind?"


In this sports-crazed country, everyone has learned a lot about what it takes to win. They've heard and seen it proven repeatedly that to achieve greatness, to win the big one, an athlete has to be ready to "put in the work."

John McCain isn't doing that, yet. He's competing as if he expects the other side to lose it for him. Sen. McCain is a famously undisciplined politician. Someone in the McCain circle had better do some straight talking to the candidate. He's not some 19-year-old tennis player who's going to win the U.S. presidential Open on raw talent and the other guy's errors. He's not that good.

There is a reason the American people the past 100 years elevated only two sitting senators into the White House -- JFK and Warren Harding. It's because they believe most senators, adept at compulsive compromise, have no political compass and will sell them out. Now voters have to do what they prefer not to. Yes, Sen. McCain has honor and country. Another month of illogical, impolitic remarks and Sen. McCain will erase even that. Absent a coherent message for voters, he will be one-on-one with Barack Obama in the fall. He will lose.

Have a good weekend.